Chile provides a blueprint for pension fund reforms
Much has been written about government's proposed social security reforms which will be implemented in South Africa in 2010. The backbone of the system will be a series of individual employee accounts, most likely designed to ensure that every worker benefits from a defined contribution pension fund at retirement.
We dont have to look too far to find examples of implementations of this type of system. In Chile, a South American country with an economy similar to ours, such reforms were implemented with reasonable success. Chile delivered a mandatory social security scheme with defined contributions which has provided real returns of 10% per annum since 1981. In 2005, Chile boasted a national savings rate of some 23.6% of GDP, with pension assets under management equal to 50% of GDP.
Fanews Online spoke to Elias Masilela., Chief Strategist of Financial Sector Developments at Sanlam Employee Benefits, to find out more about the lessons South Africa could learn from Chile.
Learning from the typical emerging market setup
Masilela believes that South Africa and Chile enjoy various economic similarities. These include a large informal sector and high rate of unemployment. "In terms of economic structure, they also faced a huge informal economy like us," said Masilela.
Introducing an individual account arrangement is more difficult when you have to roll it out to the informal private economy. Chile was able to successfully integrate the individual account arrangement with its social security system - which is a challenge that the South African system will have to address.
It took Chile approximately 12 years to implement their social security system. Chile was forced to use the implementation of this system to uplift their financial sector and the provision of a strong financial infrastructure was one of the key requirements for the system's success. A benefit which South Africa enjoys over Chile is the sound financial system that is already in place in South Africa. This should ensure that we are able to implement retirement reforms at a substantially quicker pace.
Concept of worker capitalism
The person largely responsible for designing the retirement fund system in Chile is Jose Pinera. We asked Masilela about the concept of 'worker capitalists', a phrase coined by Pinera.
The worker capitalist is aware of the part he plays in planning for a successful retirement. He has a greater awareness of the part he can play in his financial success - and is encouraged to take a more active part in his retirement planning. According to Masilela, the social security system will help to "create incentives for the worker to be much more active in the choosing of his investments."
"The employee becomes more responsible, more productive and that benefits the individual shareholder and the employee." There are a number of benefits to instilling 'worker capitalist' idealism. They include a sense of ownership and control, the appreciation of assets in the longer term and the aligning of worker interests with the interests of those who manage and control pension funds.
Turning the 'culture of consumption' tide
We asked Masilela if the current debt burden on individual South African citizens would impede the implementation of savings reforms. Masilela said that South Africa suffered from a culture of consumption. More alarming was that this culture "was funded not out of incomes, but out of borrowings."
The hope is that the social security system will reform this consumer mentality, as individuals realise they have a worthwhile savings option. The benefits that are going to accrue from the social security side, [will provide incentives for] people to come and register themselves," said Masilela.
The retirement industry remains sceptical about the intended 2010 deadline. Masilela agrees that this deadline is looking rather tenuous at present. "I think those concerns are beginning to arise even from the side of government. One can argue that it is almost a reality that it is going to be difficult to realise by 2010," said Masilela. Many challenges exist as government still has to reconcile internal views before getting the final draft to the private sector.
Masilela believes the consultation with the private sector will not be concluded this year, but rather late in 2008. The time consuming processes of legislative drafting, awarding of tenders and implementation of administrative systems can only begin once this process is complete. In summary, Masilela said, "three years may be a very optimistic period."
Editor's thoughts:
A more responsible stance on saving for retirement will definitely benefit South Africa in the long term. Ensuring that individual workers are more pro-active in their retirement planning will ensure the proposed social security reforms work. What do you understand by the term 'worker capitalist' and will this notion contribute to a successful pension reform implementation? Send your comment to [email protected]
